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Today’s sky-high personal debt levels portend a freeze in consumer spending and a rise in defaults. They could threaten your company—even if you don’t sell to consumers. Two experts explain how to calculate your firm’s risk.

This past summer a certain amount of optimism began to reemerge, with talk of “green shoots” and even a potential recovery as the stock market rebounded by 30% from its low in March. That optimism may be misplaced, however. Look at the graph below, which tracks the ratio of U.S. consumers’ debt to their disposable income. While a little off its high point, the number now stands at around 130%. In other words, it will take American consumers nearly 16 months ( 1.3 years), on average, to pay off their debt, assuming that they spend absolutely nothing on housing, clothes, or food. American consumers have maxed out their credit, and with household wealth down as a result of the property collapse and employment prospects uncertain, they’re not about to take on more. Instead, they’ll be looking to cut back on it. Many will default. Both the defaults and the waning consumer appetite for credit bode ill for businesses.

Companies that sell big-ticket consumer goods are the most obviously at risk, because credit-shy consumers can simply opt to put off buying cars, cookers, and other durable goods for another year. Very often these companies help consumers finance purchases, so defaults hit them directly. But you don’t have to be in the consumer credit business to suffer. Any company that sees a large proportion of its sales come through credit cards will experience significant drops in revenue, because people usually cut back on credit card purchases before they do on cash ones. What’s more, an increase in defaults will most likely translate into higher processing fees from the credit card companies. Even if your customers are all other businesses, you’re still not safe. What if they in turn sell cars, refrigerators, and furniture?

It’s imperative to get a handle on what changes in household financial practices will do to your company. To make that estimation, you need to calculate what we call your consumer leverage exposure (CLE) ratios, which will help you identify precisely how reductions in consumer credit will affect your company’s sales, gross margins, and operating profits. We’ve explained how you can do these calculations in an article on hbr.org, “How Exposed Is Your Business to Consumer Leverage?” Accompanying it is a useful interactive spreadsheet, into which you can slot numbers and working assumptions appropriate to your company. We think the chances are good you’ll find you’re a lot more exposed than you think.

William Jarvis (williamjarvis@hotmail.com), an associate at a major investment bank in New York, previously worked in investment banking at JPMorgan and in finance at GE Capital. Ian C. MacMillan is a professor at the University of Pennsylvania’s Wharton School of Business in Philadelphia.

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